Australia is already experiencing worst impacts of climate change. The first National Climate Risk Assessment recently released shocking new projections that endanger our housing market—and by extension our economy. According to Ian Dunlop, a noted climate change advocate, the pace of climate change is accelerating faster than anticipated. The report sounds the alarm that by 2050, one million residences will be in “very high risk” areas. This scenario will render those homes practically uninsurable. This development should be of grave concern. Following the example set by other countries, the federal government has released a national adaptation plan to address the impacts of climate change.
The implications of these findings go far beyond home insurance. All federal disaster payments could reach as high as $130 billion in the coming 40 years, based on a conservative estimate. This increase matches projections that the economic toll of disasters will more than double to at least $73 billion by 2060. Together, this figure stands for about four percent of Australia’s Gross Domestic Product (GDP). Insured losses from “insurance catastrophes” have skyrocketed. Compared to their levels of only 0.2 percent of GDP between 1995 and 2000, they increased to a remarkable 0.7 percent from 2020 to 2024.
The Economic Toll of Climate Change
Our first-ever National Climate Risk Assessment paints an alarming picture. It demonstrates just the beginning impact of climate change as manifested through the increasing frequency of natural disasters on property values and economic productivity. Even under an optimistic warming scenario of less than two degrees Celsius, the total lost property values could be up to $611 billion by 2050. Climate change effects are already decreasing labor productivity. This will lead to an enormous $211 billion decline in wealth.
Climate impacts researcher Emma Aisbett focuses on the economic knock-on effects. She notes that a four percent drop in GDP will have far-reaching implications for employment opportunities and household incomes across Australia.
“If you were to think of it in short terms, a 4 pc drop in GDP will have implications for everyone,” – Emma Aisbett
Extreme weather events, such as the current heatwave hitting much of North America, are becoming increasingly common. We estimate that this productivity surge will reduce labor productivity by around a half a pp of GDP. Climate change is contributing to this decline with an increasing number of days considered hazardous for outdoor work.
Insurance Crisis Looms Ahead
With climate-related catastrophes growing stronger and more volatile with each passing year, the burden placed on the insurance sector continues to increase. According to the National Climate Risk Assessment, insurance costs are expected to rise for properties that are insurable. Right now, matching the 15 percent threshold for household insurance premiums can be more than four weeks of a household’s gross income.
Dunlop cautions that if the insurance backstop crumbles, it will have dire economic consequences throughout the country. He argues that this collapse may prevent people from getting mortgages and slow down efforts to move people.
“Once the insurance mechanism starts to break down, then we get into much, much bigger problems economically right around the country,” – Ian Dunlop
As it turns out, Aisbett shares these concerns. He clarifies that disasters pose new, systemic risks that call into question the traditional insurance model, designed for discrete, isolated events.
“All of these disasters are systemic risks, and the current insurance industry cannot support dealing with that systemic risk,” – Emma Aisbett
That is making insurance increasingly unaffordable and harder to find. Yet because uninsurable homes preclude housing stability, they only serve to fray the fabric of our economic resilience.
The Need for Strategic Adaptation
The Australian federal government has released a national adaptation plan. This plan addresses pressing concerns and seeks to mitigate the dangers associated with climate change. Dunlop and Aisbett note that it’s critical to make strategic decisions. They draw attention to the necessity to thoughtfully select items worthy of preservation versus those that should be released.
“We have to start asking: What do we value economically? What can we retain and defend, and what things are we going to have to abandon?” – Ian Dunlop
Climate change isn’t going away, and Australians need to know what will happen if we don’t take action now. The projected impacts vary significantly depending on global warming scenarios. Under three degrees of warming, annual tourist numbers could decline by as much as 14 percent as natural disasters disrupt travel plans.
The recent 2019-20 Black Summer bushfires offer a humbling realization of the dangers we are up against. They triggered a 10 to 20 percent decrease in tourist arrivals and lost the tourism sector approximately $4.5 billion.
